The business case continues to shine

October 12, 2016 Last updated 2 months ago

As the price of grid power rises, solar’s financials are winning over more Australian companies.

Originally published in the Australian Financial Review.

During the past two years, volumes in Australia’s solar photovoltaic market have grown at a steady pace, in part because of a surge in demand from companies in NSW, Queensland and Victoria. Commercial solar is now estimated to makeup a third of the nation’s total solar PV market. As prices for solar fall and grid-power prices increase, financial outcomes from solar have received a significant boost. This has led many businesses to move solar from an “agenda item” to action.

Cost savings are largely driven by the amount of power that a business does not need to draw from the grid. In addition, the Renewable Energy Target(RET) mechanism creates further returns for businesses with solar power, by creating a market for the carbon offset. In smaller systems this can account for more than 40 per cent of the up-front cost, while on larger solar power systems this market is paying around 8¢ per kilowatt hour of renewable energy generated.

“The combined returns can create payback periods of below three years in certain regions – an amazing result on a long-term generation asset producing power for over 25 years,” says David Naismith, executive general manager for commercial, industrial and government at Solgen Energy Group, which provides turnkey solar power systems for the commercial and industrial sector. Solgen’s major projects across Australia include shopping centres for property groups, Adelaide Airport, a nationwide rollout for NBN, and several multi-site projects for large corporates. Government incentives can count for more than 4 per cent of the upfront cost of a system under 100 kilowatts. However, this incentive provided under the RET is beginning to unwind and will continue to diminish until 2030.

For larger scale systems, owners are able to receive certificates for the renewable energy they generate. The certificate value is market-based and in the current market this can almost double the returns from large solar power systems.

For early adopters, this was a key consideration. However, the business case for solar is the key driver now with green credentials an added benefit. An example of this is the rapid uptake of solar in industrial property, particularly in the construction phase where meeting green building objectives is a key consideration. Underpinning this is the fact that there are now many large corporate tenants who will not occupy buildings that fall short of certain green building ratings.

“Ultimately, solar provides a competitive edge in attracting and retaining key tenants and the benefits become a lot broader than just financial savings alone,” Mr Naismith says. The primary government policy affecting solar development in Australia is the RET. This policy set a target number of mega-watt hours required from renewable energy by 2020. In the same way, fossil fuel is heavily subsidised: the RET effectively creates a mechanism allowing users of fossil fuels to offset that use through payments under the RET. These payments are managed through a market mechanism in the form of Renewable Energy Certificate trading. As demand for Renewable Energy Certificates increases, their price also goes up, making it more attractive to go solar.

As output of renewable energy gets closer to the target, the price of certificates should normalise as the support mechanism is no longer required. When this happens, renewables will begin to be deployed without support from the RET. The policy is expected to unwind completely by 2030.

In recent years, rising grid energy prices and falling cost of components have meant financial returns have gradually become strong enough for businesses to see it makes economic sense for them.

“Our clients want to see the financials stack up without too much reliance on government policy. In turn this is driving significant growth in the sector,” Mr Naismith says.

At present, power can be delivered at around 6 cents per kilowatt hour from solar over a 20-year period. If, for instance, 20 per cent of a shopping centre’s requirements can be delivered at this rate, then the owners are reassured that they’ve manage to hedge 20 per cent of their energy costs at a low rate.

For businesses, solar works best as part of an energy mix, so as to ensure a reliable power supply. Solgen underlines the case for adopting solar by providing a power production warranty. Under this, if the system does not deliver the agreed amount of power over a year, the company will reimburse the client for the power that wasn’t generated.

In the past few years, technology advances have driven significant reductions in price, resulting in barriers to purchase gradually falling away. This has been key to placing solar on a level playing field with grid power.

“We have gone from an industry that wasn’t really solving a problem other than green credentials to one that is becoming a critical part of any business’ energy mix,” Mr Naismith says.